Riding Out the Cycle

Your endowment’s stocks will do well, says forecaster Allen Sinai, but real estate could be set for a fall.

By Karla Taylor

From studying cycles in the U.S. economy his entire adult life, Allen Sinai has an intuitive feeling for the yin and yang of growth and recession. He knows that every boom fuels the inflation that triggers the next bust, and every recession sets the stage for the recovery to follow. So when Sinai, chief global economist and CEO of forecasting firm Decision Economics, Inc., parses today’s outlook—as he will on July 10 at the 2005 NACUBO Annual Meeting in Baltimore—he can’t help but deliver a mixture of good news and bad.

The good news: “We are in the up phase of the expansion, and we are far from the end of it,” Sinai says. The stock market, too, is likely to keep on rising—although the modest gains since 2001,compared with those of the late 1990s, make this seem like “a quiet bull market indeed.” And growth is global, with even such recent laggards as Japan and Europe posting steady, albeit slow, gains.

The bad? A mild upturn in inﬂation—barely noticeable anywhere but at the gas pump—presages a long series of eventually punishing increases in interest rates. The Federal Reserve Board recently recognized that price hikes are starting to accelerate, Sinai notes.“By the time the central bank recognizes inﬂation, the process [of rising prices and wages] is usually very well entrenched,” he explains. To halt inﬂation, the Fed “will have to raise interest rates farther and faster than anyone—including the Fed—initially expected.”

A Mostly Positive Prognosis

Overseers of college endowments should take note: Those rate hikes could take a toll on one of education’s favorite “alternative investments,” real estate. Sinai sees real-estate values approaching a peak, with “lots of bubble-like activity” in residential and some commercial and industrial property markets. “The turning points for assets are much harder to predict than cycles [in the economy],”Sinai says, “but I would raise a yellow ﬂag for real-estate investments. They could be in for three to ﬁve years of difficulties”—a period akin to the shakeout of 1988–91.

The bulk of college and university assets, however, should fare better. For the next three years or so, Sinai sees stocks maintaining the sort of single-digit returns that they’ve posted since the market bottomed out in late 2002. Over the long term, equity investor scan expect returns ranging around 9 percent a year, before adjusting for inﬂation—far short of the steep gains of the Roaring ’90s,but well above the 6 percent or less that many market pessimists forecast.“I don’t think we’re doomed to 5 or 6 percent per year for-ever,” he says. “The pace of innovation in technology is incredible,”helping businesses make their workers more productive. Meanwhile, “increasingly globalized markets will mean much more competition among businesses,” he notes, lowering costs and helping boost investors’ returns.

And where in that global economy should investors take a bigger stake? While the expansion is worldwide, “the real opportunities and risks are in the non-G-7 countries”—those outside the Group of Seven large, industrial economies of North America, Europe, and Japan. Although investing in emerging markets is more costly and difﬁcult, Sinai thinks investment managers should be paying more attention to opportunities in China, many parts of Latin America, and especially India, where strong growth in the domestic market is supplemented by income from jobs outsourced by American and British companies.

When to Hear Sinai

Allen Sinai will speak at the opening general session in Baltimore on Sunday, July 10, from 8:30 to 10:00 a.m.

Here in the United States, outsourcing is one of several trends that has contribute to what Sinai calls “an odd and non-historical pace of job growth.” Rather than creating 300,000 or more jobs a month—the typical pattern for a recovery—American businesses are producing fewer than 200,000.That’s created a lot of concern about the economy’s strength—and serves as a reminder that every business cycle is different. But the broad patterns of the economy remain the same, Sinai says, and the weight of that history argues that the U.S. recovery still has some good years before the next downturn. Colleges and endowments can still reap plenty of gains between now and then.